Survival And Prosperity

City Of Chicago On Review For ‘Possible Downgrade’ By Moody’s

“We still have a very strong bond rating. Our fiscal position is getting better every year and we are aggressively managing our liabilities and obligations.”

-City of Chicago Comptroller Amer Ahmad, July 20, 2012, as noted in a July 22, 2012, Chicago Sun-Times article

I’ve been warning Survival And Prosperity readers for some time that the City of Chicago’s finances are not as peachy keen as City Hall would like outsiders to believe.

So much so, the City’s credit rating is on review for a possible downgrade by Moody’s Investors Service. From the Moody’s website earlier today:

Moody’s has announced its final approach to the way it will analyze and adjust pension liabilities as part of its credit analysis of state and local governments. These changes reflect the rating agency’s view that pension obligations are a significant source of credit pressure for governments and warrant a more conservative view of the potential size of the obligations. As a result of this new approach, Moody’s has also placed the general obligation ratings of the cities of Chicago, Cincinnati, Minneapolis, and Portland, OR, and of 25 other US local governments and school districts on review for possible downgrade. The entities whose ratings have been placed on review have large adjusted net pension liabilities relative to their rating category…

Moody’s rates over 8,000 local governments in the United States. Less than 1% of those with general obligation or equivalent ratings have been placed under review because of the new pension adjustments.

(Editor’s note: Italics added for emphasis)

Great. Chicago is in another “select group” it really doesn’t want to belong to these days.

You can read the entire announcement on the Moody’s website here.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Tags: Amer Ahmad, Chicago, City of Chicago, credit ratings, Illinois, local government, Moody's, pensions, public pensions

Nouriel Roubini Warns Stocks Could Correct

Another “Dr. Doom” is talking of a stock market correction these days.

Nouriel Roubini, co-founder and chairman of Roubini Global Economics, spoke with CNBC Europe from Lake Como, Italy, last Friday. The former Treasury official in the Clinton administration, who correctly-called the 2008 global financial crisis, talked about the U.S. economy and larger financial system. “Dr. Doom” told viewers don’t expect quantitative easing to go away anytime soon:

Increasingly QE has less effects really on the economy. There is some credit creation right now. There is a positive and so on. But certainly it is becoming ineffective. The trouble is if you take away QE very fast you could have a significant back up in long rates, and that’s going to essentially kill the recovery in its tracks. Therefore, the Fed has no choice but maintaining QE3 for as far as I can see.

(Editor’s note: Italics added for emphasis)

In addition, the professor of economics at NYU warned of a possible correction in stocks later this year:

Down the stream, second half of the year, the U.S. stock market could correct somehow.

“Roubini Warns on US Economy”
YouTube Video

Definitely more subdued than the other “Doctor Dooms”- Marc Faber and Peter Schiff- on the near-term prospects for the U.S. economy and financial markets.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)

Tags: money printing, Nouriel Roubini, QE, QE3, quantitative easing

Illinois Bond Issue Halted Due To Credit Concerns

Today, residents of the state of Illinois saw the repercussions of having $8 billion of unpaid bills, a $96.8 billion pension funding gap, and falling credit ratings. Karen Pierog reported on the Reuters website:

Illinois yanked a $500 million general obligation bond issue slated for Wednesday because of credit concerns that could boost its borrowing costs, in the latest financial blow to the state, which has failed to fix its bloated public pensions.

Investment banks that planned to bid on the debt indicated investors would demand higher yields on the 25-year bonds, said John Sinsheimer, Illinois’ capital markets director.

“We were getting indications of higher spreads than we were anticipating,” said Sinsheimer, who declined to discuss specific spread levels. “We felt it was prudent to pull the deal for the time being.”

(Editor’s notes: Italics added for emphasis)

Pierog pointed out:

Illinois is already faced with the highest spreads – 137 basis points in the latest week – over Municipal Market Data’s benchmark triple-A scale among states and cities tracked by MMD, a unit of Thomson Reuters.

Over the weekend, I noted Standard & Poor’s downgraded the State of Illinois on Friday to an “A-” rating with a negative outlook- last among all 50 states. I added that among other major credit rating agencies, Moody’s also ranks Illinois last of all the U.S. states and Fitch ranks it 49th but on watch for a possible downgrade.

As for Illinois taxpayers? They may have to pay tens of millions of dollars more in interest when the state looks to borrow more money- like what almost happened today.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Source:

Pierog, Karen. “UPDATE 2-Illinois pulls $500 mln bond sale amid credit concerns.” Reuters. 30 Jan 2013. (http://www.reuters.com/article/2013/01/30/illinois-bonds-idUSL1N0AZ6TQ20130130). 30 Jan. 2013.

Tags: credit ratings, Fitch, government bonds, Illinois, John Sinsheimer, Moody's, pension crisis, pensions, public pensions, S&P, Standard & Poor's, state government, State of Illinois

S&P Downgrades Illinois Credit Rating To Worst In Nation

When I heard a major credit rating agency had downgraded Illinois Friday, the term “death spiral state” quickly came to mind.

And then my thoughts turned to the tens of millions of dollars Illinois taxpayers might be on the hook for down the road.

Ray Long and Monique Garcia reported on the Chicago Tribune website Friday:

Illinois fell to the bottom of all 50 states in the rankings of a major credit ratings agency Friday following the failure of Gov. Pat Quinn and lawmakers to fix the state’s hemorrhaging pension system during this month’s lame-duck session.

Standard & Poor’s Ratings Service downgraded Illinois in what is the latest fallout over the $96.8 billion debt to five state pension systems. The New York rating firm’s ranking signaled taxpayers may pay tens of millions of dollars more in interest when the state borrows money for roads and other projects.

(Editor’s note: Italics added for emphasis)

Illinois now has an “A-” rating with a negative outlook from S&P. Among other major credit rating agencies, Moody’s ranks Illinois last among the 50 states and Fitch ranks it 49th but on watch for a possible downgrade.

Regarding the state’s huge pension funding gap, Mark Peters wrote on the Wall Street Journal website Friday:

S&P estimates the pension system in the coming year will see assets fall to 39% of future obligations.

(Editor’s note: Italics added for emphasis)

Hardly any talk about the crisis in the local mainstream media outlets this weekend. Amazing. I can’t understand why more Illinois residents aren’t up in arms over this humongous financial mess the state is in.

By Christopher E. Hill, Editor
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Garcia, Monique and Long, Ray. “Illinois credit rating sinks to worst in nation.” Chicago Tribune. 25 Jan. 2013. (http://articles.chicagotribune.com/2013-01-25/news/chi-illinois-credit-rating-sinks-to-worst-in-nation-20130125_1_action-on-pension-reform-robin-prunty-illinois-credit). 27 Jan. 2013.

Peters, Mark. “S&P Cuts Illinois Credit Rating.” Wall Street Journal. 25 Jan. 2013. (http://online.wsj.com/article/SB10001424127887324539304578264293106044944.html). 27 Jan. 2013.

Tags: credit ratings, Fitch, Illinois, Moody's, pension crisis, pensions, S&P, Standard & Poor's, state government, State of Illinois

Motorola CEO: Illinois ‘Asleep At The Switch, And The Day Of Reckoning Will Come’

You know the state of Illinois has real fiscal challenges when a member of the U.S. President’s Management Advisory Board (PMAB) says that’s the case. Greg Brown, President and CEO of Schaumburg-based Motorola Solutions, spoke to Crain’s Chicago Business last week and said the following about his company’s relationship to the Midwestern state:

Illinois remains front and center for us for a variety of reasons: incumbency, skills that are resident, our existing footprint. It’s Illinois’ to lose, but Illinois is on a path to lose it. The state of Illinois is asleep at the switch, and the day of reckoning will come. You can’t have the state’s fiscal house being what it is and be able to attract capital. If Illinois kicks the can and stays in a four-corner offense, then capital will move out of state, including ours. I’ve had governors of Florida and Michigan proactively call me and say: “Would you consider moving a division, opening a plant? Would you consider moving R&D here? Would you deploy a sales division here?” Illinois doesn’t think like that. It needs a complete overhaul. It needs to happen soon.

Judging by the continued inaction in Springfield (seat of Illinois government) on issues of significant fiscal importance to the state and its 12.9 million residents, something tells me that can will keep being kicked down the road until the “day of reckoning” Brown talked about finally arrives.

In the meantime, the State of Illinois continues to languish.

Consider what Ted Dabrowski, Vice President of Policy at the Illinois Policy Institute, wrote back on November 28 on the organization’s website:

Today, Illinois still has more than $9 billion in unpaid bills. The Legislature continues to run structural deficits, appropriating more funds than the revenues it receives. The state’s pension systems are more than $200 billion in the hole and facing insolvency. And the state has been downgraded 10 times by the three major rating agencies since Gov. Quinn took office.

I am truly concerned about what lies in store for the “Land of Lincoln” going forward.

Sources:

Pletz, John. “Motorola’s CEO on taxes, tablets and why Illinois is dying.” Crain’s Chicago Business. 24 Dec. 2012. (http://www.chicagobusiness.com/article/20121222/ISSUE01/312229987/motorolas-ceo-on-taxes-tablets-and-why-illinois-is-dying). 26 Dec. 2012.

Dabrowski, Ted. “Forget reform: Illinois legislators want to borrow $4 billion.” Illinois Policy Institute. 28 Nov. 2012. (http://illinoispolicy.org/blog/blog.asp?ArticleSource=5283). 26 Dec. 2012.

Tags: budget deficits, credit rating agencies, credit ratings, Greg Brown, Illinois, Illinois Policy Institute, Motorola, Pat Quinn, pension crisis, pensions, PMAB, President’s Management Advisory Board, state government, State of Illinois, Ted Dabrowski

Moody’s Revises Illinois’ Credit Rating Outlook To Negative

Moody’s Investors Service, a major Wall Street credit rating agency, announced yesterday that it has revised its rating outlook for the State of Illinois from stable to negative. Illinois is already Moody’s lowest-rated state. From the agency’s website Thursday:

Rating Action: Moody’s revises State of Illinois’ rating outlook to negative from stable; general obligation rating affirmed at A2

Global Credit Research – 13 Dec 2012

Action applies to approximately $33 billion of outstanding general obligation and related debt

New York, December 13, 2012 — Moody’s Investors Service has revised the State of Illinois’ credit outlook to negative from stable, while affirming the state’s general obligation debt rating at A2. The state has about $28 billion of G.O. bonds outstanding. We have also affirmed related ratings assigned to state borrowings, including about $2.6 billion of debt issued by the Metropolitan Pier & Exposition Authority, rated A3, and the state’s Build Illinois sales tax revenue bonds, rated A2, of which $2.7 billion are currently outstanding. The negative outlook is linked to ratings on the G.O. as well as the related credits.

SUMMARY RATING RATIONALE

The negative outlook reflects our view that the state’s pension funding pressures are likely to persist and perhaps worsen in the near term. Moreover, fiscal 2014 marks the last year before Illinois’ 2011 income tax increases are partly unwound, putting the state on track to deal with simultaneous growth in pension funding needs and loss of revenue. If the legislature in coming weeks or months enacts significant pension reforms, they are almost certain to be challenged, given the state’s constitutional protection of retiree benefits. Political pressures, coupled with the threat of litigation, may mean that any reforms enacted have only a marginal effect on liabilities. Despite a diverse economy with above-average wealth, lackluster demographic and economic characteristics indicate that, even with continued US economic improvement, the state’s existing tax structure will not provide enough revenue to address the rising cost of pension benefits and other state expenses. In addition, the state’s payment backlog remains high.

(Editor’s note: Italics added for emphasis)

Back on January 13, 2011, Illinois Governor Pat Quinn signed legislation authorizing a 67 percent increase in the personal income tax of Illinois residents and a 46 percent increase in corporate income taxes on Illinois businesses. In 2015, these taxes are scheduled to be rolled back from 5 percent to 3.75 percent and 7 percent to 5.25 percent respectively. However, as I noted that same day:

The last time income tax rates in the “Land of Lincoln” went up in 1989, politicians also claimed it was as a temporary increase to combat a financial “rough patch.” But the rates never came down and by 1993 were designated permanent. Until now, that is.

I won’t be surprised if lighting strikes Illinois residents and businesses twice.

You can read the entire rating action report on the Moody’s website here.

Tags: credit ratings, government bonds, Illinois, income taxes, Moody's, Moody’s Investors Service, Pat Quinn, pension reform, pensions, state government, State of Illinois, tax hikes

Peter Schiff Warns Obama Debt Limit Proposal Could Shock America’s Creditors ‘Into Reality’

“The U.S. runs out of federal borrowing authority around the end of the year, but the Obama administration can use special measures to extend borrowing through late February or early March. As part of the fiscal cliff negotiations, Obama has proposed effectively ending the need for Congress to periodically raise the debt limit.”

-Washington Post website, December 5, 2012

Peter Schiff, President and Chief Global Strategist of Euro Pacific Capital, talked about the looming U.S. “fiscal cliff” and a White House proposal to give the President the power to raise the nation’s debt “ceiling” as needed in his December 3 entry on The Schiff Report YouTube video blog. Schiff, who correctly-predicted the bursting of the U.S. housing bubble and 2008 global economic crisis, zeroed in on the debt limit proposal:

This could be a moment where our creditors maybe get shocked into reality. To understand the situation that they are in, that we are in. That there is no limit. That we will borrow money until we can’t do it anymore. That we’re not going to do anything about this crisis. We’re not going to do anything to diffuse this ticking bomb. It’s simply going to go off. And I think our creditors are going to want to put as much distance as they can between themselves and the explosion. They’re going to want to sell dollars. They’re going to want to sell debt denominated in dollars. What is that going to mean? A weaker dollar and higher consumer prices for Americans. It ultimately means higher interest rates for Americans. It means the rug is going to be pulled out from the slowing economy. It means we’re going to go over the Mother of All Fiscal Cliffs, and one that is impossible to avoid.

So, my advice is don’t wait for that. Get out of your dollars. I’ve been saying this for a while, but I think the urgency, and the time with which to do it, is going to be running out. So you get out of your dollars. Get out of any debt denominated in any dollars. Because we’re not going to pay our bills, we’re going to inflate them away, which is the same thing as default. So you don’t want to ride out that inflation. You want to get out of U.S. currency. You want to look at foreign currencies where the governments are much less irresponsible. Look at real money. Look at gold and silver. Look at foreign stocks if they’re suitable that pay dividends. Do whatever you can to get out of Dodge, because just when the government assures you that there’s nothing to worry about, that’s the time where you need to worry the most.

“Debt Ceiling & the Fiscal Cliff”
YouTube Video

(Editor’s notes: Info added to “Crash Prophets” page; I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)

Tags: Barack Obama, Congress, consumer prices, debt ceiling, debt limit, dividends, fiscal cliff, foreign currencies, foreign stocks, gold, national debt, Peter Schiff, silver, U.S. dollars

Michigan Lawmaker: ‘We’re Going To Have To Seriously Consider Dissolving The City Of Detroit’

As I’ve said before, once in a while I hear chatter about Chicago being on the path to becoming the next Detroit. Not the hub of America’s auto industry that “old” Detroit once was, but rather “this” Detroit:

“Scary Movie 4 – Detroit: Before & After the Attack”
YouTube Video

I guess conditions in the “Motor City” are getting so bad one Michigan state senator has gone so far as to say the legislature is going to have to “seriously consider dissolving” the city. From The Detroit News website this morning:

State Sen. Rick Jones has a solution for fixing Detroit’s ongoing political and financial problems: Get rid of the city.

“At some point we’re going to have to seriously consider dissolving the City of Detroit,” Jones told Insider.

You read that right.

Jones, R-Grand Ledge, is proposing the Legislature, which has the power to establish municipalities, should make the city part of unincorporated Wayne County.

Jones was unclear about what good it would to do to turn the city and its services for 700,000 residents over to a county with it’s owns financial and political problems.

But he said outstate lawmakers like himself are growing tired of the City Council delaying implementation of the financial consent agreement state and city leaders signed in April, inching perilously closer to payless paydays and bankruptcy.

(Editor’s note: Italics added for emphasis)

Detroit’s finances appear pretty bleak. According to Reuters last night, not only did Moody’s Investors Service lower the city’s debt ratings deeper in the junk category Wednesday, but:

Moody’s also placed a negative outlook on the lowered ratings, citing in part “the rising possibility that the city could file for bankruptcy or default on an obligation over the next 12 to 24 months.”

(Editor’s note: Italics added for emphasis)

Here’s hoping Detroit can find a way out of their serious financial and political mess.

And that chatter about Chicago becoming the next Detroit doesn’t pan out.

Sources:

“Political insider: Senator says to dissolve Detroit if it can’t fix its problems.” The Detroit News. 29 Nov. 2012. (http://www.detroitnews.com/article/20121129/POLITICS02/211290357/Political-insider?odyssey=mod|newswell|text|FRONTPAGE|s). 29 Nov. 2012.

“Moody’s cuts Detroit debt ratings deeper into junk.” Reuters. 28 Nov. 2012. (http://www.reuters.com/article/2012/11/28/detroit-moodys-downgrade-idUSL1E8MSDCJ20121128). 29 Nov. 2012.

Tags: Chicago, City of Detroit, county government, credit ratings, Detroit, government bonds, Illinois, local government, Michigan, Moody’s Investors Service, municipal bonds, Rick Jones, state government, Wayne County

Best- And Worst-Run U.S. States In 2012

New York City-based financial news and opinion organization 24/7 Wall St. has just released their 2012 list of best- and worst-run states in America. While they ranked all 50 based on financial health, standard of living, and government services data, 24/7 Wall St. declared the top 5 best-run states to be:

1. North Dakota
2. Wyoming
3. Nebraska
4. Utah
5. Iowa

The top 5 worst-run states are:

1. California
2. Rhode Island
3. Illinois
4. Arizona
5. New Jersey

Last November, 24/7 Wall St. named Illinois the 2nd worst-run state in America. Up to 3rd this year? High-fives all around the “Land of Lincoln” today. Here’s what 24/7 Wall St. had to say about Illinois this year:

48. Illinois

> Debt per capita: $4,790 (11th highest)
> Budget deficit: 40.2% (2nd largest)
> Unemployment: 9.8% (tied-10th highest)
> Median household income: $53,234 (18th highest)
> Pct. below poverty line: 15.0% (25th highest)

Although many states have budget issues, Illinois’ faces among the biggest problems. In 2010, the state’s budget shortfall was more than 40% of its general fund, the second-highest of any state. Both S&P and Moody’s gave Illinois credit ratings that were the second-worst of all states. In addition, the state only funded 45% of its pension liability in 2010, the lowest percentage of any state. Governor Patrick Quinn has made the now-$85 billion pension gap a top priority for the new legislative session beginning in January.

“$85 billion pension gap.” Make that $96.8 billion last I heard.

And as for Wisconsin, where I plan on moving to in a couple of years? 24/7 Wall St. ranked the “Badger State” the 21st best-run state in America this year- down from 16th in 2011.

You can find out where 24/7 Wall St. ranked your state this year by going here on their website.

Tags: 24/7 Wall St., budget deficits, credit ratings, Illinois, Pat Quinn, pension crisis, pensions, public pensions, state government, Wisconsin

Is Illinois Greece?

If California is Greece, then Illinois is Spain.

-Panelist at June’s “State of the Nonprofit” conference in Chicago (hat tip The Greater Good blog)

The proverbial brick wall keeps getting closer in Illinois. And even though the state’s financial woes- and what needs to be done to fix them- are painfully obvious, the politicians carry on as if it were business as usual.

The problem is, it’s not. And years of fiscal mismanagement are really starting to bite the “Land of Lincoln” in its rear-end.

Take the state’s credit ratings, for example. From Karen Pierog on the Chicago Tribune website yesterday:

Illinois lawmakers’ inability to reform a woefully underfunded public retirement system at a special session last Friday is likely to weigh on the state’s already relatively low credit ratings.

“We are in the process of reviewing the total credit picture, including the budget, pensions, etc,” Standard & Poor’s Ratings Services analyst Robin Prunty said on Tuesday.

“But certainly, the lack of action on pensions is not a credit positive.”

Pierog, who is affiliated with Reuters, added:

S&P, which rates Illinois A-plus with a negative outlook, put the state on notice in March that it could face a multiple-notch general obligation rating downgrade if there is no “credible progress” in taming its huge $83 billion unfunded pension liability and on tackling a structural budget imbalance.

Another credit rating agency, Moody’s Investors Service, downgraded the State of Illinois to A2 from A1 earlier this year.

According to the California State Treasurer’s website this morning, California’s S&P and Moody’s credit ratings are A- (lower than Illinois) and A1 (higher than Illinois), respectively.

But it’s not just credit ratings where years of poor policymaking are coming back to haunt the state. Pierog noted:

Investors are demanding higher yields to invest in Illinois’ bonds as its so-called credit spread over Municipal Market Data’s benchmark triple-A scale for 10-year debt is the widest at 157 basis points among major U.S. city and state debt issuers tracked by MMD, a unit of Thomson Reuters. California’s spread by comparison is less than half of Illinois’ at 66 basis points.

Perhaps that panelist got it wrong. California could be Spain, and Illinois, Greece.

Source:

Pierog, Karen. “Illinois’ inaction on pensions in rating agency crosshairs.” Chicago Tribune. 21 Aug. 2012. (http://www.chicagotribune.com/news/sns-rt-us-illinois-pension-ratingbre87k0uj-20120821,0,6367324.story). 22 Aug. 2012.

Tags: budget deficits, California, credit ratings, government bonds, Greece, Illinois, Illinois bonds, Illinois credit ratings, Illinois General Assembly, Moody's, pensions, public pensions, Spain, Standard & Poor's